Senate Bill: No More Arm-twisting

A bill introduced Thursday night would make it illegal for federal enforcement agencies — including the Securities and Exchange Commission — to demand documents that are protected by client-attorney confidentiality in exchange for lenient treatment in federal prosecutions.

The Attorney-Client Privilege Protection Act of 2008, proposed by ranking Republican senator Arlen Specter, addresses controversial guidelines set out by two former deputy attorney generals that dictate procedures for corporate prosecutions. While the guidelines are not legally binding, they allow federal enforcement agencies to pressure company officials to give up privileged information before being allowed to say their companies are "cooperating" with a government investigation.

In 2006 the guidelines were revised in the so-called McNulty memo, written by former Deputy Attorney General Paul McNulty. The memo requires that the deputy attorney general sign off on any prosecutor's request to share attorney-client-privileged information.

The McNulty memo alters previous guidelines, set in 2003 by former Deputy Attorney General Larry Thompson, which said that for a company to claim it was cooperating in a Justice Department investigation, it had to waive its attorney-client privilege, give up material from internal investigations, and could not provide executives with a company-paid lawyer.

Although the two memos do not apply directly to the SEC, the Justice Department works closely with the securities regulator, often sharing information on prosecutions. The SEC also has a similar policy called the Seaboard report, created by former commissioner Harvey Pitt. One of its most controversial provisions is the recommendation that companies share the results of their internal investigations with the SEC — regardless of whether the reports are protected by attorney-client privilege.

In a statement made on the Senate floor Thursday night, just before Congress headed for its summer recess, Specter, a former prosecutor himself, accused the Justice Department of using its prosecutorial power to "erode the attorney-client relationship by allowing prosecutors to request privileged information backed by the hammer of prosecution if the request is denied."

Specter's legislation would ease the dilemma that CFOs and other finance executives face when being questioned in a government investigation. Indeed, while finance executives may want to cooperate with federal prosecutors, they could incriminate themselves by turning over privileged documents.

Last July a federal judge threw out a case involving the controversial guidelines. Charges were dropped against 13 former KPMG employees because prosecutors had pushed the accounting firm into not paying their legal fees.

A companion bill to Specter's legislation passed the House last November. Further, supporters of the Senate proposal are confident it will pass, according to a bipartisan group of 12 senators called the Coalition to Preserve Attorney-Client Privilege. "Attorney-client privilege is too important to be subject to the whims of each new deputy attorney general," said the group in a statement. "The Justice Department's failure to rein in prosecutors who force organizations to waive privilege leaves Congress no choice but to make such violations illegal."